Is Merck the Best Option In This Group?

With shares of Merck (NYSE:MRK) trading at around $47.56, is MRK an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

An FDA panel recently voted for approval of Suvorexant (insomnia). This doesn’t guarantee FDA approval, but increase the odds of approval. A decision is expected within a few months. Suvorexant’s potential is high. However, it hasn’t been all good news for Merck.

Singulair (asthma) Q1 sales declined 75 percent year-over-year due to patent expiration and competition from more affordable generic drugs. Maxalt (migraines) has also seen a drop in sales due to the ever-increasing threat of generics, and Temodar (brain cancer) is likely to see competition from generics. Another negative for Merck was that Phase III studies didn’t show enough efficacy for Merck to pursue regulatory filings for Preladenant (Parkinson’s). Other negatives include a revenue decline last year, a year-over-year revenue decline of 9 percent last quarter, a year-over-year earnings decline of 8.30 percent last quarter, and weak guidance.

In order to satisfy shareholders, or in order to at least keep them tame, Merck recently announced that it will repurchase $7.5 billion worth of shares through May 2014. This is in addition to Merck yielding 3.60 percent. By comparison, GlaxoSmithKline (NYSE:GSK) currently yields 4.30 percent, and Pfizer (NYSE:PFE) currently yields 3.40 percent.

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While GlaxoSmithKline offers the highest yield, it also has a debt-to-equity ratio of 2.54, which is well above the industry average of 0.40. This has the potential to lead to future problems as debt becomes more expensive. Merck has a debt-to-equity ratio of 0.37, and Pfizer has a debt-to-equity ratio of 0.49. Therefore, as far as this article is concerned, the competition has been reduced to two.

Sticking with the competitive theme, Merck is trading at 24 times earnings and has a profit margin of 13.04 percent whereas Pfizer is trading at 14 times earnings and has a profit margin of 26.95 percent. Cash flow is strong for both companies. It should also be noted that both have a short position of 0.80 percent, which is minuscule. Shorts don’t want to get involved with strong and well-run companies that have future potential. As far as pipelines go, they’re difficult to evaluate because they’re more of a subjective matter. For example, you can find analyst opinions that state Merck has a strong pipeline, and you can find analyst opinions that state Merck has a weak pipeline.

Let’s take a look at some important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

Merck has been a steady performer over the past three years. However, Pfizer has been the strongest performer of the group over there-year and one-year time frames.

1 Month Year-To-Date 1 Year 3 Year
MRK 3.09% 16.82% 26.84% 52.89%
GSK 1.86% 24.13% 22.09% 76.22%
PFE 0.21% 16.72% 34.34% 109.5%

 

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Merck is close to the industry average of 0.40.

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Debt-To-Equity Cash Long-Term Debt
MRK 0.37 16.02B 20.82B
GSK 2.54 6.29B 31.06B
PFE 0.49 35.41B 40.40B

E = Earnings Have Been Inconsistent

Merck is unique in the sense that earnings have declined since the difficult years of 2008 and 2009. Revenue has increased since that time, but revenue declined in 2012. The rise of generics has played a role.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 23,850 27,428 45,987 48,047 47,267
Diluted EPS ($) 3.64 5.65 0.28 2.02 2.16

Looking at the last quarter on a year-over-year basis, revenue has declined 9 percent, and earnings have declined 8.30 percent.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 11,731 12,311 11,488 11,738 10,671
Diluted EPS ($) 0.56 0.58 0.56 0.46 0.52

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

With competition from generics, revenue declines, and weak guidance, Merck isn’t the ideal investment candidate at the moment. Pfizer offers a better valuation, its profit margin of 26.95 percent demonstrates better efficiency, and it has outperformed Merck over the past three years. This pattern should continue.

Merck is a WAIT AND SEE.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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